Academic journal article The International Journal of Business and Finance Research

Capital Structure Timing in Markets with Different Characteristics

Academic journal article The International Journal of Business and Finance Research

Capital Structure Timing in Markets with Different Characteristics

Article excerpt


Considerable empirical evidence suggests that firm's time equity issues to market movements and that this behavior impacts capital structures. Based on a survey of investigations of this phenomenon, this study observes capital structures in different financial markets and identifies different situations related to the effect of timing on leverage. This study also explains optimal leverage with a simplified dynamic adjusted model. Firms facing financial constraints in debt financing may increase equity issues resulting in considerable leverage variance. On the other hand, firms with fewer financial constraints can time the market when issuing equity. This study takes regional samples from the United Kingdom and Japan, to summarize circumstances involving partial financial constraints and no financial constraints. The market timing effects tests in the United Kingdom are insignificant but the results for Japan are significant. This phenomenon improves understanding of the market timing model under different circumstances.

JEL: G30; G31

KEYWORDS: Market Timing, Capital Structure.

(ProQuest: ... denotes formulae omitted.)


International capital structure is seldom examined, perhaps because of data limitations and insufficient methods for comparing different markets. This study investigates differences in financial market leverage and the impact of market timing on capital structure in markets with different characteristics. Pecking order and tradeoff theories are applied at static points and may lead to misleading leverage information. Consequently, some studies investigate capital structure also across different time periods. Opler and Titman (2001) stated that financial decisions include an optimal target debt ratio. Hovakimian and Titman (2001) used two stage regressions to conclude that firms adjust to an optimal target debt ratio that may change over time and be related to profitability and stock price. Baker and Wurgler (2002) used weighted market-to-book ratios as a proxy for the past impact of equity issuance on capital structure and declared that the market-to-book effect exerts a persistent and long lasting influence on capital structure.

The market timing effect on capital structures under different market characteristics reveals countries with similar characteristics but different financing patterns. This phenomenon can supply data for investigating whether weighted market-to-book ratios represent a good proxy for deviation between current and target debt ratios (Baker and Wurgler, 2002). The United Kingdon (UK) and Japan are chosen for examination in this study. Both countries belong to the G-7 and have similar market capitalization percentages, at around 80% (Rajan and Zingales, 1995). Firms from these countries have more financing via banks, meaning external financing is not fully reflected in their capital structure, or perhaps leverage can be adjusted to reach the target. This study proposes a simplified dynamic adjustment model, similar to that of Banrjee et al. (2000) to explain how leverage effects vary among markets.

The remainder of this paper is organizes as follows. The following section reviews the relevant literature. Next, the theory is presented. A discussion of the data and methodology and presentation of test results follows. The paper closes with some concluding comments.


Modigliani and Miller (1958) showed that in an idealized world without taxes, firm value is independent of the debt-equity mix. In short capital structure is irrelevant to firm value. Other researchers, such as Hamada (1969) and Stiglitz (1974), support the perspective of Modigliani and Miller. However, these conclusions do not match observations of the real world, in which capital structure matters and banks are extremely unwilling to finance projects entirely using debt capital. The main theories explaining capital structure are the pecking order and tradeoff theories. …

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